What is a Market Standoff Agreement?
A market standoff agreement prevents insiders of a company from selling their shares in the market for a specified number of days after an initial public offering (IPO). The market standoff term is generally 180 days but can vary from as little as 90 days to as much as one year.
These agreements are also known as lock-up agreements.
- A market standoff agreement, or lock-up agreement, forbids insiders from selling shares within a certain defined period after the IPO or prospectus filing.
- This helps protect the underwriter who is attempting to create a market for the IPO, and the investors who are buying the IPO.
- Insiders selling shortly after the IPO can cause large price drops, hurting investor confidence in the stock.
Understanding a Market Standoff Agreement
Market standoff agreements allow the market to absorb the sale of all new shares of stock issued in an initial public offering (IPO). If insiders or others holding shares of the company can immediately begin to sell their holdings, it can flood the market and cause a precipitous decline in stock value. Generally, any issuance of company stock to employees will have a clause in the contract allowing the issuer to lock-up insider sales during an IPO. If not, insiders could challenge the prohibition on selling their shares.
A private company is a firm held under private ownership. They may issue stock and have shareholders, but their shares do not trade on a public exchange until they go through an IPO or other offering processes. Companies may issue private shares to encourage investment and to reward employees.
Market Standoff Agreements Protect Brokerage Houses
Market standoff agreements are usually required by brokerage houses when they are hired to market and underwrite an IPO. The brokerage house gets a fee for underwriting the initial public sale. Also, they will generally provide the issuer a guarantee for the number of shares they will sell during the offering. This guarantee can place the underwriting bank at considerable risk. If the stock value plummets during the IPO, the brokerage could lose money.
Since a massive insider selloff would almost certainly dissuade new buyers of the stock, brokerage firms are prudent to restrict such sales. An example of the impact inside sellers can have on a stock is seen during the dot-com boom, and later the bust beginning in 2000. Numerous stocks in the sector lost a significant chunk of their market capitalization within weeks of the expiration of market standoff agreements.
Flexible Expiration Dates
In recent years, market standoff agreements have been revised in light of new exchange rules governing brokerage research reports. Those rules prohibit an underwriter’s research department from publishing an analyst’s report or a buy/sell recommendation on the stock in question within the 15 days before and immediately after the expiration of a market standoff agreement. If the company issuing the stock expects to be releasing an earnings report within that period, the market standoff agreement is often advanced by enough days to allow publishing a report.
For example, a company plans to issue an IPO on April 10, 2020. The market standoff agreement expires 180 days later, on October 7. But the company is planning its quarterly earnings release on October 15, which is within 15 days of the expiration. By moving the standoff agreement to month's end, on October 31, the brokerage firm can publish a research report for its clients on October 16, the day after the earnings release.
Real-World Example of a Market Standoff Agreement
On May 10, 2019, Uber Technologies (UBER) commenced trading on the New York Stock Exchange (NYSE) at $42. As recorded in filings with the Securities Exchange Commission (SEC), directors and executive officers agreed that they would no sell their shares, or engage in trades that would mimic a sell transaction, for 180 days after the filing of the prospectus (filed on April 11, 2019) without prior written consent from Morgan Stanley & Co. (MS), the underwriter. A transaction that would mimic a sale transaction is buying put options on the stock, for example.